This week, Sun Pharma bought about 64% of Ranbaxy from Daiichi Sankyo for $3.2 billion, a move that surprised many industry observers. Indian entrepreneurs are used to, and comfortable with, selling companies to multi-national corporations. Until now, however, they have not sold pharma businesses to competitors in India. Sun’s acquisition of Ranbaxy is first of its kind and scale.
Ranbaxy, which had gone from rising star to troubled company in a single decade, had become a case study in cross-cultural business relationships and due diligence gone wrong. For its Japanese parent, Ranbaxy had become a (roughly) $2-billion mess, as the challenges of working with India-based management, and assessing the financial impact of inadequate quality control and assurance, became increasingly apparent.
Daiichi’s experience has a lot to teach pharma. Will the industry learn? It had better learn fast. This is an extremely competitive and challenging time, when payers demand value and results, and the public cries out for affordable pharmaceutical products .
Ranbaxy had been on a fast track when it started supplying generic drugs to the developed countries. The World Trade Organization opened the floodgates, as high profit margin countries became the company’s growth markets. Fast growth resulted in expansions. However, profits and growth led to overconfidence and need to supply the growing markets likely led to short cuts in manufacturing and supply chain.
Issues with FDA in the U.S. came to light in 2006, but Ranbaxy’s compliance and quality problems had remained under the surface for several years. This was due mainly to understaffed regulatory agencies in developing nations. Now that these regulators are staffing up and increasing their scrutiny of manufacturing operations, problems at Ranbaxy continue to bubble up to the surface. We can expect to learn about more of these over time.
Given Ranbaxy’s quick early rise, it’s not surprising that Daiichi Sankyo saw the company as an opportunity. However, Ranbaxy’s regulatoryrelationship time line and whistle blower’s account suggest that its Japanese parent’s due diligence was incomplete. One wonders: had Daiichi management consulted with their counterparts at Suzuki, a Japanese company that had been operating in India since 1982, to learn about the methods and challenges of operating in India? A discussion would have revealed many of the issues and challenges Daiichi was going to face in its relationship with Ranbaxy.
Did Daiichi do any of the following, one wonders:
- Place the right staff at every site and within the management infrastructure of the acquired company from “day one” of the acquisition?
- Understand the psyche of staff at Ranbaxy?
- Grasp the competency of Ranbaxy management?”
Based on ongoing citations and consent agreements, it is obvious that they did not. The India-based management team, in turn, did not seem to understand the implications of FDA actions or did not fully convey the information to Daiichi management in Japan. Meanwhile, at the top levels, Daiichi Sankyo’s management did not seem to understand the financial implications of what was going on at Ranbaxy.
In March 2013, Arun Sawhney, Ranbaxy’s managing director claimed to have taken steps to improve quality. However, putting a new board and new executives in place does not guarantee improved quality. Only staffing operations with skilled and competent people can allow this. From continuing FDA citations, it was clear that Ranbaxy/Daiichi did not have the right plan in place.
In any acquisition, "due diligence" means a lot more than simply reviewing financial statements and portfolios. The buyer has to be aware of what is going on the plant floor, in research and development labs and quality, regulatory affairs and other support functions. Relying too much on a paper review is recipe for failure, for any manufacturing company and particularly a highly regulated, global one.
I fault Daiichi for trusting what was presented to its management, rather than verifying, by digging into the company’s plant and laboratory operations.
Ranbaxy’s management did what it needed to do to clinch a sale. But even the Indian firm may pay for this, years later.
Daiichi Sankyo and the Singh family (majority stock holders prior to sale) are currently in litigation over the sale. Did the Singhs present what was going on within the company? Did Daiichi understand the implications of what it was presented, or even more importantly, what it didn’t hear about?
Were any steps taken to study procedures and compliance, and documentation? Did anyone look into supply chain management? Did Ranbaxy have the required level of control over its processes, procedures, training and supply chain management? Regulatory citations suggest that it didn’t, and the number of these citations just kept mounting over time.
Even remediation efforts were incomplete, as Ranbaxy turned to consultants, who “fixed” the documentation without appearing to deal with the underlying processes. Much time, effort and money were spent without meaningful results. An exceptional opportunity to change the global generic pharma landscape was lost.
How much of this was due to Indian management style is open to conjecture, but recent Ranbaxy citations suggest a very strong connection.
Assimilation is going to be very turbulent. There will be personal, and personnel, issues. It will be interesting to see how peer-to-peer challenges of yesterday morph into boss-subordinate issues. Based on India’s culture, assimilation is going to be dicey. Another fact Sun would have to deal with is availability of competent and trained personnel who are attuned with global quality and competitive values. Sun Pharma’s succession planning and/or lack of it could also influence the merger.
Mylan’s acquisition of Matrix, India was well executed and can be a case study. How Mylan deals with Agila , its new acquisition, could be an interesting application of its past experiences.
Sun Pharmaceutical’s first priority should be to address the compliance issues. It will also have to address issues of personnel, personal relationships and accountability. All these will be new issues for Indian company management, as, generally, the current relationships are different from what most of us are used to in the developed countries.
Besides people issues Sun should review the current business model and study how better manufacturing technologies might be introduced in the manufacture of API and their formulations.
Taking a “process centric” rather than a regulation centric approach would offer opportunities to transform the pharma business model, and the whole landscape, allowing for permanent quality improvements and exceeding baseline regulatory requirements. Perhaps continuous formulation practices might be used, and opportunities exploited for continuous manufacturing of API (active pharmaceutical ingredients).
Clearly, this story promises to be interesting, on many levels, for a long time to come. What are your thoughts? Please write in and let us know. -
Originally published on Contract Pharma